Crash_Watcher

Sunday, April 6, 2014

I hadn't intended there to be a part 3—but I would like to share three interesting
pieces of news that nicely fit in with some themes of this series, and, I have
a bit of free time on my hands this weekend to write about it.

The Bankruptcy and Restructuring/Breakup of Energy Future
Holdings

Energy
Future Holdings, Texas's
largest power provider, came into existence in 2007 with a $45-48 billion leveraged
buyout of TXU Corporation, as brokered by the likes of KKR, TPG and Goldman
Sacks.Overvaluation of TXU's assets,
especially in the face of the subsequent economic depression of 2008 and
continued low energy prices (thanks to the fracking boom), has made it
impossible for EFH to repay the increasing debt burden associated with the LBO,
and now, bankruptcy looks inevitable (see, Greed
doomed the TXU buyout).The recent
departure of KKR CEO, Marc Lipschultz, for the Board of Directors of EFH
probably signals a likely Chapter 11 restructuring of EFH's assets.

EFH is the parent of three subsidiaries: Oncor, which
handles electricity transmission to 3 million customers, TXU energy, the
states' largest electricity retailer, and Luminant, which generates about 18
percent of Texas'
electricity, at least in the summer months.Both Oncor and TXU energy
look economically viable, and therefore, are attractive subsidiaries to
buy.

As I wrote in Part 2, Luminant owns five of those old
coal-fired electricity generating plants, some of which have been getting
mothballed during the winter month, and, which are too unprofitable, at least a today's energy prices,to retrofit to comply with the Clean Air Act
requirements.Those five plants have a name-plate capacity of about 8000 MW which correspond
to about 11-12 percent of Texas
power generation capacity at any given time during the summer months.

There is speculation (In
Energy Future Holdings shakeup, size matters) that a restructuring would go
easier if the coal-fired plants were to be split off from Luminant's nuclear
and natural gas, and, further speculation, that as part of a restructuring, those
coal fired plants will not just get mothballed, but torn down.I wonder who would want to buy Luminant if
the maintenance or retrofitting these five plants was part of the deal (even a
tear down of these plants would be very expensive, I think).

If the closure of these five plants were to happen, however,
then ERCOT's summer power reserve margins would get blown away.For instance, a loss of 8000 MW of power
generating capacity would drop ERCOT's previously expected reserve margin from 13.6%, for the summer of 2014, to only 1-2%.Under this scenario, I would expect that that there would be multiple
rolling blackouts, and a spike in electricity prices, this summer.

Does the fate of Texas'
coal plants and potential permanent loss of 8000MW of power have ERCOT worried
or sounding the alarm?Why no, quite
the opposite.

ERCOT'S Revised Load and Reserve Margin Forecast

In a dramatic turn-around from its previous forecast of May
2013, Capacity-Demand-Reverse
Report for 2013, in January 2014, ERCOT
announced peak demand margins going forwards that implies that the possibility
of rolling blackouts is remote.There is no electrical power predicament after all.What happened?

Instead of an annual growth rate in peak electricity of 2-3
percent/year, as predicted by ERCOT last May 2013, ERCOT's new forecast predicts 1.3±0.1 percent/year
demand growth for the next decade.This
results in a dramatic increase Texas's
expected reserve margin for the next several years.

In the past, ERCOT
has used weather and economic indicators, such as non-farm employment, to
forecast future electric demand. However, the relationship between economic
growth and electric demand has changed in recent years. While peak demand
growth has slowed to about 1 percent annually, the economic forecasts and
non-farm employment statistics used in recent load forecasts have resulted in
growth forecast estimates of 2 to 3 percent in the two- to three-year outlook.

This recent trend
implies a less direct correlation between these economic indicators and
electric demand than in the past. To address this decoupling, ERCOT
staff has developed a new load forecasting model that uses forecasted growth
rates in customer accounts, or premises, to project future growth trends in
each region served by the ERCOT grid.

In short, ERCOT's new model assumes a decoupling between
electricity demand growth and economic indicators, such as employment, and instead
now looks at growth rates in customer accounts or premises to predict future
electricity demand.

In a another
publication describing this new method of future load forecasting (based on a neural network model) ERCOT presented a figure which I think sums up their reason for adopting a new
model (Figure 5):

As you can see, starting from the mid 1990s, there has been an
increased decoupling between electricity demand and GDP.ERCOT attributed this to things like increasing
efficiency of electrical devices (think light bulbs), declining energy use per
customer and improvement in electricity distribution. But maybe there are other reasons as well.

Based on this new model, at the end of February 2014, ERCOT came out with its latest Capacity
Demand and Reserves Report (CDR)—the report being released four months
earlier than previous in years.In
particular, a new Summer Summary prediction for demand, capacity and margins,
reproduced in Figure 6 below, reflects the new margin and peak demand estimates.

The result of the new model is a prediction of much higher
reserve margins than previously forecast.For instance, the reserve margin (red) is predicted to actually go up to
15.4% in 2015, and, it doesn't drop below 13% until after 2018.In contrast, the May 2013 CDR (Figure 4) had predicted
the 2018 margin to be 9.4%.Notable,
13.75% has long been considered an acceptable target reserve margin by ERCOT.

With peak demand growth assumed to be 1.3 percent/year, the Feb 2014 CDR
predict a peak power demand (blue) of 71806 MW by 2018, which is ~4400 MW lower
than the peak power demand of 76186 MW by 2018, predicted in the May 2013 CDR.

Moreover, this increased margin is in spite of the 2018
total power resources being lowered from 80760 MW, as predicted in the
May 2013 CDR, to a predicted 79575 MW in the Feb 2014 CDR.

Brattle Group Report (BGR)

Commissioned by the Public Utility Commission of Texas
(PUCT), this report
published at the end of January 2014 attempts to estimate the "economically
optimal reserve margin for ERCOT’s wholesale electric market."

The bottom line of the BGR is that, from an economic
perspective, a reserve margin of 13.75% is "inefficient" because it is designed
to meet a one-day-in-10-year load loss event (0.1 LOLE)—a standard to ensure loss
of power, on average, only 1 day in ten years.Instead, the BGR recommends a new reliability standard that would be
more "economically optimal."This new standard, termed, "expected unserved energy" (EUE)
standard, weighs the "total system" cost of building more power generation
plants to keep the reserve margin high, versus the costs related to a "scarcity-event."The BGR finds that only a 9-11% reserve margin
is economically optimal.The report
estimates that a 11.5% reserve margin, would be insufficient to meet peak loads
only once every three years.On average, a 1600 MW short fall would only need to be curtailed for 2.6 hours on average
during such "load shedding" event.

Interestingly, this report was shortly followed by a
memorandum to ERCOT from PUCT commissioner Anderson questioning the need for PUCT
or ERCOT to take any quick action based on this report:

If the Commission
were to adopt a mandatory reserve margin, what Brattle refers to as a
“reliability based standard,” they recommend the adoption of the “normalized
expected unserved energy” (EUE)6 standard because it considers the
magnitude and duration of events among its factors.7 Adopting a EUE
approach would constitute a total redesign of ERCOT’s reliability standard,
which should not be done without careful evaluation by the Commission and the
ERCOT stakeholders. Analyzing the EUE recommendation should be conducted as
part of a truly broad and intensive study of the appropriateness of ERCOT’s
reliability standard and resulting reserve margin.

The BGR's assertion that a 10 reserve margin is
contrary to the North
American Reliability Corporation’s estimate of an acceptable reserve margin
of 15 percent—a margin that ERCOT has not been able to attain in the past
several years.

Summary and Thoughts

I don't think that it a coincidence that the early
publication of ERCOT's Capacity Demand and Reserves Report, and, the publication
of Brattle Group Report are being released just as Texas's largest electricity provider, Energy
Future Holdings, heads into bankruptcy.

The new Capacity Demand and Reserves Report suggests much a lower rate of demand growth increase, and therefore Texas, can have "acceptable"
reserve margins of 13.75%for the next
several years.Brattle Group Report goes one further in suggesting that this 13.75% margin is way too high and could instead be 10-11% for "economic
optimization."

Let's just set aside the apparent paradox of ERCOT adopting
a new method of predicting demand growth that specifically does not directly
consider economic indicators, and, the BGR that specifically recommends
lower reserve margins based on "economic optimization."

To me these two reports may be setting the stage for a restructuring of
Energy Future Holdings where those five coal-fired plants are rapidly phased
out of ERCOT's power grid. The ability to eliminate these uneconomical coal-fired plants would make the purchase Luminant more attractive.

Still, the loss of 8000 MW of potential power provided by
the five plants reduces ERCOT's summer reserve margin to only 1-2 % and that would be a problem. How can we reconcile this?It seems like a no-brainer to say that, for at least the near future, at least some of these coal-fired plants have to be maintained and de-mothballed each
summer in order to provide an acceptable margin of peak demand.

But, perhaps now in light of the new CDR and BGR, it will seem
more acceptable for some plants to be decommissioned immediately or next year.

For example, consider the new CDR shown in Figure 6.According to ERCOT, for 2014, summer resources
equals 74805 MW and firm load equals 66179 MW, giving a 13.5% margin.If one were to eliminate one or two
coal-fired plants with a total capacity of about 2000 MW, then resources drops
to 72805 MW, and therefore, the new margin becomes 10% which just happens to equal BGR's "economic
optimum."Likewise for 2015, if
coal-fired plants with a total capacity of about 4000 MW are eliminated, then
the margin again equals 10%.

In my opinion, not running one to four of these coal fired plants during the summer months would obviously increase the risk
of load shedding or rolling blackout events.Texas only needs to have
a summer as hot as the summer of 2011 to test this.Perhaps from the Battle Group Report author's
perspective, cozy in their offices in Cambridge, Massachusetts, the prospects
of industrial and residential load shedding and rolling blackouts for several
days in August fall within the scope of "economic optimization."After all, this is estimated to only be for 2-3
hours per day and only occur every 3-4 years.

I seriously doubt, however, that that the "total system"economic repercussions of an
electricity "scarcity-event" has been fully accounted for in the BGR.For instance, will businesses still want to
relocate to Texas
when they hear news of several days of rolling blackouts or load shedding by industries and residents in the summer months? Also "economic optimization" does not
necessarily mean optimal for human living.People, especially the elderly, suffer or die in the summer in Texas when the
air-conditioning goes out. Is that considered as part of the "total system" cost? Maybe, from an economic perspective, who cares,
so long as the state government, PUCT or ERCOT doesn't have to pay for it directly.

And, what about looking further out to more than a few years?Look again at Figure 6, for 2020 and beyond.Even with Luminant's coal-fired plants considered
as part of the summer resources and assuming only 1.3%/year peak demand growth, the reserve margin was predicted to drop below BGR's "economic optimum" of 10
percent.What then?

With the present stricter enforcement of the Clean Air Act and other EPA rules, the prospects building of new power plants that would provide significant base load (i.e., coal, nuclear or even natural gas) in time to mitigate the reserve margin drop look very remote. The price of electricity would have to rise significantly before that would happen, I expect. But doubling or tripling electricity prices would cause demand to go down. And, there you have a downwards energy spiral, Texas-style.

Perhaps targeting peak demand growth to customer account growth does make more sense than using employment or other economic indicators. After all, an unemployed Texan probably moves out of their own residence and moves in with someone else, moves out of state, or, out on to the street. Consequently, their utility provider account gets closed. Of course, such repercussions of scenarios are really not ERCOT's problem. Again the this reflects a difference between an "economic optimum" versus a "human optimum."

From a broader perspective, the increasing decoupling
between GDP and electricity use (Figure 5), to me, just represents the increasing
decoupling of GDP numbers from reality.
That is, the increased churning of digital money between parties all
counts towards GDP, which increasingly, has little to do with the real physical world or the life of the average human.

Sunday, January 19, 2014

I ended Part 1 with questions about the future of older coal
fired electricity power plants and the possibility of replacing plants and
expanding electricity demand as Texas's
economy and population continue growing.

The demise of coal-fired plants

Back in late 2011, the owner's of Monticello coal-fired plant in Titus
County, Luminant, had threaten to shut down or "idle" rather
than implement costly upgrades to put the plant
in compliance with the Clean Air Act, and, ERCOT suggesting that they couldn't
force Luminant to keep a plant open in violation of federal pollution rules (see
e,g,m Texas
power grid operator says blackouts possible).

Although part of Luminant's reason for mothballing the
plants is stiff economic competition from power generated by natural gas
plants, I think that it is the cost to comply with the EPA rules under the
Clean Air Act is what will lead to the eventual demise of all of these
plants.

A new coal fired plant, the Sandy Creek
plant near Waco,
with a 900 MW capacity, did come online in 2013.Its opening, however, was only after a
settlement with the Sierra Club who had fired a lawsuit against the plant's
owner alleging violations of the Clean Act, among other things.After years of legal battles, as part of the
settlement the owners agreed to pay for stricter air pollution controls and to
not build coal-fired plants in Georgia
and Arkansas.The SandyCreek owners are still embroiled in
legal battles with a company, NAES, hired to maintain and operate the plant, alleging
that NAES's mismanagement damaged the plant's boiler (Sandy
Creek power plant owners suing over 2011 boiler incident).

While some see this as "big win for clean air in Texas," and it probably is, I wonder how this will
impact Texas's
ability to meet its growing power demand. Are there any non-coal power
generating projects underway to actually expand the power grid and not just
replace the existing capacity produced by the coal plants being mothballed or
shutdown?

In an interesting Forbes article, Will
Summer Blackouts Doom The Texas Boom?, Christopher Helman gave a summary of
Texas's
energy status going forward.New
electrical capacity from Nuclear Power does not appear to be in the cards given
the blockage of to two new Japanese Toshiba reactors.Two 760 MW capacity gas-fired plants
owned by Panda Power are scheduled to come on line in 2014, and there is a third
plant scheduled to come on line in 2015.The 540 MW natural gas-fired Ferguson
power plant in Llano in 2014 will replace the old 420-MW plant which closed
in the fall of 2013.Such gas fired
plant are important to ERCOT for their ability ramp up quickly when electricity
demand spikes—something that wind or solar power, or, even nuclear or coal are
NOT particularly good at.Finally, Helman's
article talks about another 3,000 MW of wind power set to be built by
2015.But even if all of this wind power is built, for
reasons already discussed in past articles in this blog, on a hot Texas summer
day, one might only expect to get ~10% or less of the name plate capacity from wind.

That seems to be about it—about 1,500 MW in 2014, and
another 1,000 to 1,500 MW in 2015, depending on how you feel about the wind
power contribution you could count on in the summer.

Keeping in mind that at a peak summer power usage of around
67000- 68000 MW, and, the need to grow the capacity by about 2 percent per year,
ERCOT's goal should be to add about 1350 MW capacity per year every year, just to
keep it's reserve margin about constant.

As illustrated (red circle), ERCOT expects its summer
reserve margin to steadily decline from a margin of about 13.6% in 2014 of
total capacity to 4.5% by 2023.For
comparison, the North
American Reliability Corporation’s acceptable reserve margin
is 15 percent, and, NARC estimate of Texas's
reserve margin to be 12.9%. NARC indicated that the peak demand growth rate in Texas (about 2.7%/year) is projected to be the highest in
the United States.

It is noteworthy that the growth in year-to-year summer
peak demand shown in the above table (blue circle) appears to be based on (or
is equivalent to) an assumption of demand growth increasing by 3 percent per
year (e.g., 72071 x 100%/69807=103 %) for the next few years, and then, suddenly slowing
down to less than 1 percent per year by 2021. I don't know where these projections come
from.

If I take ERCOT's 2014 "firm load forecast," and increase it
by a constant 2 percent per year every year, then the reserve margin drops
below 0% by 2023.If I take that same 2014
firm load forecast and increase it by a constant 3 percent per year every year,
then the reserve margin drops below 0% by 2020.Of course, weather is the wild card, and on any one summer day,
particularly hot weather could shift ERCOT into emergency load shedding.We already know from the experience of 2011, and
ERCOT's own emergency
plans, that coming within ~3.4 percent of power resource capacity would
trigger industrial load shedding with rolling blacks outs to follow soon afterwards. Texas has just been lucky so far.

ERCOT has done two other things in an effort to mitigate Texas's inadequate and
declining reserve power margin.

Understanding that Texas needs the summer capacity from
the aging coal-fired plants like Monticello, Martin-Lake and Big Brown, ERCOT
has raised its price cap on wholesale electricity, presumable to motivate owners, like Luminant, to de-mothball these plants every summer and supply an
important part of the based load summer power capacity.A coalition of these power providers are
pushing for some kind of guaranteed compensation in the form of permanent cap
increases to keep these plants available for summer use in the years ahead (Rolling
blackouts are Texas' future without reform, generators say)

I don't see this as a workable solution, given that in
2014 the EPA wants to implement more stringent rules for CO2 emissions from
existing plants, and, none of the existing plants in Texas are in compliance with such limits.The owners of these plants, like Luminant,
find the costs of retrofitting these plants with carbon capture technology
"unworkable." (Texas
electric grid getting greener even before EPA crackdown).

If, for example, Luminant decided that it wasn't financially
worthwhile anymore to "de-mothball" the Monticello and Martin-Lake plants for the summer and just leave them
closed for the summer of 2014 and beyond, then that would drop ERCOTs power
generating capacity by about 4000 MW. The 2014 reserve margin would then drop
to 7.8% percent and to only 4.8% by 2016.I'm not sure who the public would blame for the likely ensuing rolling
blackouts—the EPA, Luminant or ERCOT?Would
the Clean Air Act rules be waived after a few summers with extended periods of
rolling blackouts and people dying from heat exhaustion?Perhaps we will see.

The other thing that ERCOT is doing is promoting voluntary
conservation.In 2013 ERCOT introduced a
voluntary pilot program, the 30-Minute Emergency Response Service ("30-Minute
ERS), for homeowners groups and commercial users to be compensated for cutting their
electricity use during times of peak demand when power supplies are tight and
prices spike, if, they can reduce power use by at least 0.1 MW within 30
minutes (ERCOT
plan rewards electricity cuts during peak demand).Presumably this option would be implemented at Energy
Emergency Level 1, when the grids' reserve margin drops below 2300 MW. This pilot program is still being tested, but from
a November
2013 report with about 1600 potential participants it looks like the 30-Minute
ERS could produce reductions of 100 to 200 MW.

With over 6
million residential smart meters installed across Texas the potential impact
of some form of residential power load shedding program is much larger than
this. Residential load shedding would
work best if those volunteering for the program simple have their power load
shed automatically as needed by the electric utility via a smart meter. For instance,
PUC
of Ohio is advertising how smart meters will give customers the opportunity
to "assist" PUC through voluntary “load shedding” where PUC will send
signals to thermostats and other appliances to adjust the devices’ activity
until another signal is delivered to restore normal activity. I would think
that a special device would have to be installed so that the power company
could selectively remotely control these appliances.But perhaps a smart meter could
be used to more grossly limit the total amount of power flowing into individual
households.A smart grid controlling
smart meters has been proposed as a solution to mitigate Pakistan's terrible grid problems by Dell.Pakistan is currently facing a power
generation shortfall of 6000 MW which results in 8-12 hours blackouts
throughout the country.

Of course, the "carrot" to volunteer for such programs
will be a price reduction, or rebate, when and if your power load gets shed (ERCOT
will pay homeowners to conserve electricity this summer).Low income customer will be attracted to
this, and, a partial shutdown of certain appliances is certainly preferable to full-scale
rotating blackouts.Those who can afford
to pay a higher price for electricity need not worry about such inconveniences—for
now.

Winter power woes

One final note that involves those those coal-fired power plants that
are mothballed over the winter and the reliability of the grid.I expect
that mothballing will be a growing trend if natural-gas prices stay low and rules
under the Clean Air Act become increasingly stringent and enforced.

But mothballing a significant portion of the
States' steady base load capacity can start to affect power reliabilty
during the winter months.Last November
2013, a cold winter snap caused Texas
to have its highest
electricity use on record for the month of November of 46,931 MW on
November 26. The previous month, October, had also set a new demand record of
54,710 MW for that month.The absolute
magnitude of this amount is paltry compared to the summer month's daily peak usages of
66,000-68,000 MW, but it is during the fall and winter months that power plants
either get mothballed or shutdown for servicing.Still, despite these records set in October and November, I saw no
reports of the Texas
power grid being stressed.

On Monday, January 6, another cold snap through Texas did cause ERCOT
to issue a Energy Emergency Alert and implement “demand response" mitigation with
entities that contract to reduce their electric use when needed.What was the demand level that cause this
alert?Only 55,486 MW—just slightly
higher than that October record.

Power consumption of 55,486 MW was enough to get to an Energy Emergency Alert Level 2, meaning that the
reserve capacity was less than 1750 MW.Texas was probably less
than 1000 MW away from rolling blackouts, I suspect.At the heart
of the emergency was the unexpected loss of 3700 MW of power production capacity
from two plants that had equipment failures due to the cold weather.That caused ERCOT to import about 1000 MW of
power from the Eastern USA and Mexico
and for wholesale electricity prices to hit the cap limit set by ERCOT.

While the loss of 3700 MW from these two unnamed plants might
have been a "surprise," what was not a surprise was the about 10,000
MW worth scheduled plant shut down in capacity for maintenance and mothballing.

What about the winter wind?Well that Monday, the wind capacity at
ERCOT's disposal was 17 percent of the 10,400 MW nameplate capacity,
providing about 1782 MW or 3.2 percent of the grid's total power generation.(Role
of Texas wind power debated after winter emergency; Did
Wind Really Save Texas from Rolling Outages?).I think this just goes to show, once again, that wind can provide some base load capacity but that base load contribution will variable.There still has to be enough steady base load
(coal and nuclear) and variable (gas) capacity to provide a reliable power margin.
In my opinion, as the coal-fired plants
get mothballed in increasing amounts, the size and reliability of this margin will
diminish.

This Saturday, January 18, ERCOT
issued another Level 1 energy emergency alert after yet another
expected/unexplained power plant outage of 1200 MW.As noted by one
reporter, Saturday morning was rather unremarkable weather-wise, with temperatures
in the 50s°F. It is hard to imagine that this plant outage was due to equipment failure
from cold weather.Once again, a Level 1
alert is issued when the margin drops below 2300 MW, so the loss of 1200 MW
from one plant was enough to drop the grid below this margin. If this plant had gone out the week before, then there highly likely would have been rotating blackouts in Texas.

These alerts underscore just how close Texans
are living near the margin for rolling blackouts—trying to walk a tight rope between
high prices, federal air pollution regulations and a reliable electricity grid.

===========================

This has been my first "free" weekend since October, where
I have not either been sick, working, or, both!I will be back again, to what has become this occasional blog, as time
and health permits.